Blackstone bets there's gas money to be made in the oil patch

4/18/2017

NEW YORK (Bloomberg) -- The oil boom in the Permian basin, America’s most prolific crude play, has become a gas boom.

With its $2 billion takeover of EagleClaw Midstream Ventures, Blackstone Group on Monday became the latest company to bet on gas in a basin better known for its oil reserves. Its interest lies in “associated gas” -- a term used to describe the gas that comes out of an oil well along with the crude. Gas volumes will rise fivefold in five years on the EagleClaw system, said David Foley, CEO of Blackstone Energy Partners.

Gas output from the Permian, which accounts for more than a quarter of America’s oil production, has risen to a record every month this year, government data show. That’s spurring deals in the region. Just in the past three months, Targa Resources took over gas pipelines in the Permian from Outrigger Energy and Western Gas Partners exchanged assets for a stake in a gas-gathering system there. Drilling for Permian oil is covering a bigger area and moving south, boosting gas volumes, Foley said.

“We’ve got beachfront property, basically,” Foley said by phone. “And the beach is continuing to extend. We’ve already got, existing or under construction, three-quarters of a billion cfd of processing capacity” for natural gas.

The Permian has more than just booming production going for it. Blackstone says it’s targeting the play because supplies there are linked to global prices. In contrast, natural gas prices in eastern U.S. basins, such as the Marcellus shale, have been weighed down by a regional glut of supply.

Easy Exports

Permian gas may be easily exported to Mexico via pipeline and as liquefied natural gas from terminals on the Gulf of Mexico, Foley said. Texas gas also sells at less of a discount to the benchmark Henry Hub in Louisiana, compared with Marcellus supplies, according to data compiled by Bloomberg.

“Export is the single biggest source of growth in natural gas demand in the U.S.,” he said, “and this asset is next door.”

Blackstone has invested extensively in energy since the late 1990s, raising $7.4 billion since 2011 for two funds focusing on the segment. Its bigger energy investments include a joint venture with Cheniere Energy in Louisiana to export liquefied natural gas and a deepwater drilling project in the Gulf of Mexico.

Through the end of last year, Blackstone’s first energy fund, a $2.4 billion vehicle that began investing in 2011, had delivered a 13% annualized return after fees, according to a company report. The second fund, which closed in early 2015 and which had deployed less than 13% of its $5 billion, had posted a 36% annualized return on invested capital.